- No one likes paying higher prices, which is why for most of 2022 inflation has been one of the biggest issues on Americans' minds.
- This historic bout of inflation is primarily the result of how the COVID-19 pandemic upset the global economy, exacerbated by the war in Ukraine.
The Fed has been raising interest rates in an effort to pump the brakes on rising prices.
And if it works, we should finally see the economic legacy of COVID fade into the past.
- However, there's something else driving price hikes that's far beyond the reach of the central bank to solve, climate change.
I'm sure you've heard plenty about how a warming planet will hurt polar bears and coral reefs, and beach houses on the Florida coast, but the economic impacts of climate change will trickle down to everyone.
Even if you don't live in a flood zone your pocketbook will get soaked.
(light upbeat music) - There are three main categories of costs that climate change will affect, and the first is energy.
Here in Texas, air conditioning is ubiquitous and it's pretty much a given that you'll be running it nonstop from May to September.
But as global temperatures rise, many other regions and cities that don't normally rely so heavily on AC will start using more and more electricity to cool their homes.
This will be offset somewhat by less demand for heating fuels like oil and natural gas in the wintertime, but the net effect will be an increase in most Americans' energy bills.
- In fact, it's already happening.
The average monthly electric bill in the US increased by around 10% in the last 10 years.
Over the same time period, average monthly consumption fell by 2.3%, probably due to the growing popularity of energy-saving appliances and lighting.
So if it wasn't for green tech, the increase would've been even greater.
- Unfortunately, many economists expect energy prices to rise even higher than market forces would predict for two reasons.
One, increasing energy production doesn't mean just turning up a dial.
Much of our energy infrastructure was built decades ago with specific limits on capacity.
To meet increasing demand, providers will have to renovate existing structures, build new plants, and lay new cables and pipelines.
All of this costs money, which they will pass on to the consumers in the form of higher prices.
- The second reason is that most existing power plants use water for cooling.
Higher temperatures means more evaporation which means less water and warmer water.
And pumping water in from other regions requires, you guessed it, energy, increasing demand even further.
So these plants will likely run at a lower efficiency than they did in the past, especially in the very places where demand for electricity will be highest.
- The upshot is that you can expect to pay more to power your home in the future.
Technology built around sustainable energy like solar panels won't get you completely off the grid anytime soon, but it will start making economic sense to more and more households, especially if a federal subsidy can help with those installation costs.
- The next sector of the economy that will see significant price hikes thanks to climate change is food.
Most of that is due to extreme weather.
Even before the war in Ukraine upset that country's grain exports, the price of wheat had surged to its highest level in eight years, mainly the result of high temperatures in the US and Canada.
In fact, as of the summer of 2022, more than 95% of the Western US is in some level of drought.
In 2021, drought and high temperatures caused 93% of wheat produced in Washington state to be in poor or very poor condition.
- To make matters worse, price hikes caused by drought can often be self-exacerbating.
For example, when water is scarce in California, it drives up the price of thirsty crops, like almonds and pistachios.
Perversely, this makes those crops more lucrative, motivating farmers to grow more of them and further depleting the water supply.
Economists call this unfortunate phenomenon the tragedy of the commons.
- But it's not just droughts.
In 2021, less than a year after coffee prices had recovered from a drought in Brazil, they rose again, this time because it extreme frost.
Here in Texas, in that same year, a deep freeze caused at least $600 million in agricultural losses, and other extreme weather events like floods and hurricanes can increase the cost of transporting food from the farm to your table.
- Of course, as long as there's been agriculture, humans have been dealing with inclement weather.
If one food source had a bad year, consumers could supplement with another.
What makes this period so unprecedented is that so many crops are in crisis simultaneously.
That makes it much harder for the average person to escape the economic effects.
- The third sector of the economy that climate change will upend is insurance, particularly in property and casualty insurance which protects homes, cars, and personal belongings.
This sector took in around $1.6 trillion in premium payments in 2020 alone.
- Insurance is supposed to function as a safety net.
If calamity befalls one person, the collected payments of everyone else can save them from financial ruin.
But as floods, hurricanes, and wildfires become more common it's changing the math.
Insured losses from natural disasters in 2021 reached $130 billion, almost twice the yearly average.
Insurers are responding by raising their premiums, with the average US homeowner insurance payment increasing by 11.4% since 2017.
- But if you live near a coast or in a floodplain, you might see a much steeper premium hike.
Since 1968, the federal government has been subsidizing flood insurance through the National Flood Insurance Program, which allows homeowners in flood-prone areas to buy insurance at far lower rates than what a traditional insurance company would charge.
In 2019, FEMA announced that they would reprice these policies to more accurately reflect the risks.
- This is meant to keep the program solvent and discourage new building in areas threatened by climate change, but it's also a question of fairness.
For decades, middle and low-income families who live inland have been paying more for their insurance so that wealthy people can pay less for their mansions on the coast.
How much less?
According to the New York Times, some Florida homeowners may eventually pay up to 10 times more for their flood insurance once the price change takes effect.
- Whether it's energy, food, or insurance, how much more you'll pay in the future depends a lot on where you live, but virtually no one will get away scot-free.
The global economy is remarkably versatile and resilient.
But if the pandemic taught us anything, it's that when a crisis hits many different sectors and economy simultaneously, that's when things can get really bad.
And that's exactly what climate change is poised to do.
- But it's not entirely bleak.
If governments and industries around the world can respond with policies that cut carbon emissions and develop new, more efficient technologies we can still avoid the worst-case scenario.
- For decades, some have argued that fighting climate change is too expensive, but that's like deciding not to spend the money to fix a leak in your roof.
Eventually, when the roof caves in, the damage will cost far more than the fix.
- I guess the difference is that if your house is destroyed you can still move to another one.
That's not quite the case with planet Earth.